Forge Group Ltd (In Liq) (Receivers and Managers Appointed) v Hutchinson

Supreme Court of NSW|2021-05-12|Before: Stevenson J

Solicitors: Banton Group (Plaintiff/Respondent) Minter Ellison (First Defendant) Jackson McDonald (Second and Fourth Defendants) Quinn Emanuel (Third, Tenth and Eleventh Defendants) Clifford Chance (Sixth Defendant) Clyde & Co (Seventh and Eighth Defendant) Wotton + Kearney (Ninth Defendant) DLA Piper (Eighteenth and Nineteenth Defendants) File Number(s): SC 2017/237882

Decision

I propose to grant leave to Grant Thornton to file the proposed Amended Commercial List Response and Cross-Claim. However, I propose to refuse Grant Thornton leave to file the proposed Cross-Claim against the Director Defendants.

Delay

There has been some delay.
Forge commenced these proceedings against the Director Defendants on 4 August 2017. Forge commenced separate proceedings against Grant Thornton on 8 February 2019.
On 15 September 2019, the two proceedings were consolidated, and on 20 November 2019 Grant Thornton filed the Response now sought to be amended.
The application for leave to amend comes 17 months later and within 3 months of the hearing date.
The explanation for the delay, such as it is, is contained in an affidavit sworn by Grant Thornton's solicitor, Mr Simon Hubbard.
Mr Edwards, who appeared with Mr Bagley for Forge, contended that an explanation in circumstances such as this is required from the moving party, and not merely its solicitor or counsel.
Mr Edwards referred to Tamaya Resources Ltd (In Liq) v Deloitte Touche Tohmatsu (A Firm). [4]
It is true that in that case the Court [5] said: [6] "It must be borne in mind that the explanation required is that of the moving party, not merely their solicitor or counsel. The client may very well know of matters relevant to the explanation for delay which are not known by the lawyers".
But it is clear from what their Honours said in the next paragraph that they were not laying down a general rule to be applied in all cases. Thus, immediately following the passage I have set out, their Honours said: [7] "Evidence as to the explanation for delay will often be given by an applicant's solicitor from their own knowledge but that may, in some cases, not be sufficient".
In this case, I see no reason why the explanation cannot be given by Mr Hubbard.
Having said that, the explanation given by Mr Hubbard is, as Mr Edwards submitted, somewhat "thin".
In relation to the paragraphs in the proposed Amended Response that Forge opposes, Mr Hubbard said: "22.2 The proposed [paragraphs 373A and 383C] arise from the evidence contained within: 22.2.1 the outlines of intended evidence of David Moore and Brett Smith, served by the Plaintiffs; and 22.2.2 the lay witness affidavit of the Ninth Defendant, David Simpson. 22.3 The Auditor Defendants could not be satisfied as to the totality of the evidence regarding the matters in those paragraphs prior to the service of the said outlines and lay witness affidavits. 22.4 The proposed [paragraph 383A] arises out of the documents produced by way of informal discovery. 22.5 The proposed [paragraph 384A] are by way of clarification of the existing pleadings only. They do not raise any new facts for trial."
As to Mr Hubbard's 22.2.1, the outlines of evidence from Mr Moore and Mr Smith were served a year ago. And the informal discovery referred to at 22.4 was made in 2019.
However, for the reasons I have explained below, the amendments in substance arise out of matters already pleaded and are by way of clarification and elaboration on them.
I do not find any shortcoming in the explanation of delay to be decisive.

Prejudice

Mr Edwards submitted that prejudice is both presumed and provable, [8] and that the proposed amendments will introduce new factual issues that will need to be investigated and potentially responded to.
However, Mr Edwards did not suggest that Forge could not meet those allegations.
Mr Edwards also submitted, in writing, that there was a "real possibility that these amendments would imperil the hearing". No such suggestion was made during oral submissions. I see no reason to think that the amendments sought will imperil the hearing.

The proposed amendments

The proposed amendments are contained in pars 373A, 373B, 383A, 383B, 383C, 384A and 387-390 of Grant Thornton's proposed Amended Response.
I do not consider it necessary to set out the text of the proposed amendments. And, for simplicity, I will adopt, without elaboration, defined terms in the List Statement Response. I will identify defined terms by using quotation marks.

Proposed pars 373A and 373B

In existing par 372, Grant Thornton: 1. alleges that Grant Thornton was not provided with the "Clough Report" or the "First or Second RSM Reports"; and 2. repeats for the purpose of the Response the allegations made by Forge in its List Statement at pars 92 to 103 under the heading "Director's Knowledge of Inadequate Project Management and Governance: January 2012 to 30 September 2012".
At existing par 373, Grant Thornton alleges that by reasons of the matters at par 372: 1. Forge breached cl 4.2 of the "Standard Terms"; and 2. by the "Forge Representation Letter" and the "CTEC Representation Letter", Forge engaged in misleading or deceptive conduct for the purposes of s 1041H of the Corporations Act 2001 (Cth) and cognate legislation.
In proposed par 373A, Grant Thornton alleges that on specified dates Forge knew or ought to have known certain matters concerning items in the "DPS Budget" and in relation to the "DPS Project".
Mr Brereton SC, who appeared with Mr Hughes for Grant Thornton, submitted that the documents referred to were drawn directly from the outlines of evidence of Mr Moore and Mr Smith to which Mr Hubbard referred [9] .
Proposed par 373B draws pars 373 and 373A together and in effect, repeats, in a more refined and detailed manner, the matters pleaded in existing par 373.
Mr Edwards submitted that this was a "new allegation". However, it appears to me that it arises from the manner that Forge has pleaded its case against the Director Defendants, and the evidence that Forge has foreshadowed it will adduce in support of that case.
Further, I think Mr Brereton was correct to submit that the allegations in par 373A are matters that, on the unamended Response, would be open to Grant Thornton to put to Forge's witnesses and to make the subject of the submissions.
I think that Mr Brereton was also correct to submit that the proposed amendments refine and make more specific allegations that are already made in the Response.
In any event, as I have said, Mr Edwards did not submit that Forge cannot meet the allegations I expressed.
I propose to allow these amendments.

Proposed pars 383A, 383B and 383C

These paragraphs may be dealt with together as they each relate to Grant Thornton's existing causation defence.
Grant Thornton has already put causation in issue by simply denying Forge's allegations of loss.
The proposed paragraphs, in effect, explain why Grant Thornton says there is no causal connection between the allegations concerning its conduct and the loss complained of.
As Mr Brereton submitted, "all of this could be the subject of legitimate submission and cross-examination without the proposed elaboration in the pleading".
The basis of Forge's opposition to these paragraphs was expressed to be because of the incorporation of the allegations in par 373A into two of these paragraphs.
As I propose to allow par 373A, this provides no further reason to disallow the amendments.
I propose to allow the amendments.

Proposed par 384A

In existing par 382, Grant Thornton alleges that Forge was contributorily negligent.
Mr Edwards accepted that the allegations here depend on facts already in issue but submitted that Grant Thornton's characterisation of that conduct as negligent raises a new issue.
I think that Mr Brereton was correct to submit that, by pars 384A.1 to 384A.6, Grant Thornton is simply picking up and repeating Forge's own allegations of negligence against the Director Defendants. The characterisation of that conduct as negligent has already been put in issue by Forge itself.
Mr Brereton accepted that the allegations in pars 384A.10 to 384A.13 require particularisation.
I propose to allow those paragraphs only if they are appropriately particularised in the Amended Response.

Proposed pars 387 - 390

These paragraphs seek to invoke s 1318 of the Corporations Act and to allege that Grant Thornton at all times acted honestly.
Mr Edwards submitted that this introduces "new facts about whether [Grant Thornton] acted honestly, whether they ought to be excused and whether they should be wholly or partially relieved under s 1318".
However, Forge does not allege that Grant Thornton acted dishonestly, and indeed eschews any such allegation.
I do not see what difficulty can be caused to Forge by permitting Grant Thornton to seek reliance on s 1318.

Conclusion as to amendments to the Response

Subject to the matter at [55] above, I propose to grant leave to Grant Thornton to amend its Response as proposed.

Proposed Cross-Claim against Forge

Grant Thornton's proposed Cross-Claim against Forge repeats allegations made in its Response, including some of the allegations sought to be included in the Amended Response.
Forge's opposition to the proposed Cross-Claim was because it "essentially picks up the issues" in the paragraphs in the proposed Amended Response.
As I propose to allow those paragraphs, there is no further basis on which Forge opposes Grant Thornton having leave to file a Cross-Claim against it.

Proposed Cross-Claim against the Director Defendants

By the proposed Cross-Claim, Grant Thornton seeks equitable contribution from the Director Defendants on the bases that: 1. the claims made by Forge against Grant Thornton and the Director Defendants are in respect of the same loss; 2. the claims made by Forge against Grant Thornton and the Director Defendants are made on the same basis, in that each is alleged to have acted negligently, or negligently failed to act with knowledge of a number of identified matters; [10] 3. Grant Thornton and the Director Defendants thereby have co-ordinate liability to make good the one loss; and 4. the Director Defendants should give Grant Thornton equitable contribution for such amount as is just and equitable.
The proposed Cross-Claim is "parasitic" [11] in that it proceeds on the assumption that Forge succeeds in its claims against both Grant Thornton and the Director Defendants. Thus, it incorporates by reference, and for the purposes only of the Cross-Claim, allegations made by Forge in its List Statement.
The Director Defendants do not raise an issue as to delay or prejudice but contend that leave to bring the Cross-Claim should be refused because the proposed Cross-Claim is bound to fail. The Director Defendants contend that, assuming in Grant Thornton's favour all of the matters alleged in the proposed Cross-Claim, including the matters which are incorporated by reference from Forge's List Statement, as a matter of law equitable contribution would not be available. That is said to be because Grant Thornton's liability in those assumed circumstances would not be co-ordinate, nor of the same nature nor to the same extent, as that of the Director Defendants.
Mr Brereton submitted that, in any event, this question was best left for trial and that it was unlikely that, were leave granted, much if any time would be added to the hearing time. That was because, Mr Brereton submitted, the outcome of the proposed Cross-Claim would depend upon the extent to which Forge was successful in its claims against the Director Defendants and Grant Thornton. The question as to what, if any, equitable compensation should be made, Mr Brereton submitted, could be determined by reference to the measure of success achieved by Forge.
Mr Brereton referred to the decision of Ward CJ in Eq in Smith v Australian Executor Trustees Ltd; Creighton v Australian Executor Trustees Ltd, [12] in which her Honour, on a summary judgment application, declined to make a determination or comment on the merits of the contribution claim in question. [13] However, her Honour was dealing with the particular circumstances in that case, which included certain pleading deficiencies not present here. Her Honour's decision does not appear to me to provide guidance as to what I should do here.
At this stage, the question of whether Grant Thornton should be given leave to bring the Cross-Claim must be determined assuming the correctness of the allegations proposed to be made in the Cross-Claim, either directly or by incorporation of Forge's claims in its List Statement. Thus, Grant Thornton's claim for equitable compensation could not be better than it must be assumed to be for present purposes.
In those circumstances, my conclusion is that the question is best decided now, and not left for the trial.

Principles

Equitable compensation is available: 1. where "several persons have a common obligation" such that "they should as between themselves contribute proportionally in satisfaction of that obligation"; [14] 2. even if "the obligation of each of two obligors has a different source" [15] or is for different amounts; [16] 3. where there is a "common exposure of the obligors…to the obligee"; [17] and 4. where the obligations of the obligor and the obligee are "of the same nature and to the same extent". [18]
It has been said that the principle is not to be defeated by "too technical an approach". [19]
On the other hand, it is not sufficient that obligations are "owed to the same party and related to the same transaction or otherwise connected in time or circumstance". [20]
Further: "The authorities show that no court has departed from the requirement that the equity to contribute depends on obligors bearing a common burden, the basis for co-ordinate liabilities in respect of the one loss. A proposition that…equity looks to substance rather than form…has never been invoked successfully to achieve departure from, or modification of, that requirement." [21]

The claims made by Forge against Grant Thornton

Grant Thornton audited the financial statements of Forge and CTEC for the financial year ended 30 June 2012, and, at the conclusion of the audit expressed unqualified opinions in respect of Forge's and CTEC's financial statements.
Forge's claim against Grant Thornton is based on an alleged breach of s 1041E of the Corporations Act. Forge asserts that Grant Thornton made statements and disseminated information that was "false in a material particular" or was "materially misleading" in circumstances where it ought "reasonably to have known" of such falsity and misleading nature of the information.
The false and misleading statements are three opinions expressed by Grant Thornton which are described in the List Statement as the "Appendix 4E Clearance Opinion", the "GT Audit Opinion" and the "GT CTEC Opinion".
These opinions are alleged to have been expressed by Grant Thornton during the audit and, as set out above, are alleged to have been in respect of the matters set out at footnote [10] above.
The essence of these claims is that Grant Thornton should have given greater scrutiny to various issues. These issues relate to the "DPS Project" and the "WAPS Project". Forge alleges that Grant Thornton failed to comply with specified "Auditing Standards" dealing with, amongst other things, how revenue and expected loss should be allocated in relation to those projects, and, in breach of duty, failed to reach the conclusions required by those standards.

The claims made by Forge against the Director Defendants

Forge's claims against the Director Defendants allege a breach by the Director Defendants of their duties under s 180 of the Corporations Act and the general law to exercise their powers and discharge their duties as directors with the appropriate degree of care and diligence.

The Acquisition Directors

The allegation against the Acquisition Directors arises out a narrow range of events said to bespeak their negligence and breach of duty in allowing Forge to acquire CTEC.
Forge alleges that, in breach of duty, the Acquisition Directors received the "October 2011 CTEC Board Paper" and the "December 2011 CTEC Board Paper" and attended two board meetings at which it was resolved to enter the "CTEC Share Purchase Agreement" and to proceed with the "CTEC Acquisition" subject to conditions, and: 1. were aware, or should have been aware of various matters, including those set out at footnote [10] above; or 2. did not obtain or read the board papers or "avail themselves" of the circumstances leading to the CTEC resolutions; or 3. did read the board papers but failed to cause Forge to undertake a due diligence in relation to the CTEC transaction.
The allegations thus relate to a confined and defined period and a series of events occurring between October 2011 and December 2011.

The Ring-Fence Directors

Forge's allegations against the Ring-Fence Directors relate to, first, the "Increased Forge Exposure" of Forge to the liabilities of its newly acquired subsidiary CTEC and, second, their failure to "ring fence" CTEC's liabilities in various specified ways so as to protect Forge from that exposure.
Forge alleges that the ninth defendant, Mr Simpson, who was then the Managing Director of Forge, caused or permitted Forge to enter transactions leading to the Increased Forge Exposure without board approval from the remaining Ring-Fence Directors. Forge also alleges that the remaining Ring-Fence Directors either acquiesced in Forge becoming subject to that exposure or were unaware of that exposure, despite having a duty to know and understand the details of Forge's finance and security facilities.
Forge makes very specific allegations in respect of these matters.

Mr Hutchinson and Mr Simpson

Mr Hutchinson and Mr Simpson were successive managing directors of Forge.
Forge makes particular allegations against Mr Hutchinson and Mr Simpson concerning the "Management of CTEC Assets", the "Premature Payment of Second Earn Out Payment" and the "Premature Release DPS Security Amount."
These are particular allegations about particular management decisions and are separate from the allegations made generally against the Acquisition Directors and the Ring-Fence Directors.

Are these claims of the same nature and to the same extent?

I think it clear from this analysis that the claims that Forge makes against Grant Thornton are not of the same nature or extent as those made against the Director Defendants and that Grant Thornton's liability to Forge is not co-ordinate with that of the Director Defendants, assuming those liabilities were established.
The claims made against Grant Thornton arise out of opinions Grant Thornton is alleged to have expressed during its audit of Forge and CTEC.
The claims made against the Director Defendants arise out of their alleged conduct as directors in the particular circumstances that I have set out above.
The fact that claims against both Grant Thornton and the Director Defendants are, in effect, in negligence and are said to have caused Forge the same damage is not, in my opinion, sufficient for there to be co-ordinate liability between Grant Thornton and the Director Defendants, such as would or could warrant equitable contribution.
The point can be illustrated considering the circumstances of some particular directors.
Some Acquisition Directors were not Ring-Fence Directors. These include the first defendant, Mr Hutchinson and the second defendant, Mr Ellison. The conduct complained of, in respect of these directors, occurred between October and December 2011 prior to the acquisition by Forge of the shares in CTEC in January 2012. The audit occurred many months later, and well after the CTEC acquisition. Forge's claim against Grant Thornton relates to the audit of CTEC after its acquisition by Forge and thus to post-CTEC acquisition matters. Thus, Forge's claims against these directors arise out of separate and distinct events, remote in time and different in nature. The obligations of these directors to Forge are not of the same nature or extent as those of Grant Thornton.
Another example is those Director Defendants who joined the Forge board after the audit was complete. These include Mr Kempton and Mr O'Connor. Obviously, Forge's claims against these directors arise out of separate and distinct events, remote in time. The obligations of these directors to Forge are not of the same nature or extent as those of Grant Thornton.

Conclusion

For these reasons, I will allow Grant Thornton leave to amend its List Response and to bring a corresponding Cross-Claim against Forge, but refuse leave to bring the proposed Cross-Claim against the Director Defendants.
The parties should confer and agree on the orders necessary to give effect to these reasons.
If there is a dispute about costs, the parties should agree a timetable for short written submissions. I shall deal with that question on the papers.

Endnotes

Forge Group Limited & Anor v Hutchinson & Ors [2021] NSWSC 370.
I will adopt the singular for convenience.
As set out in the "Nature of Dispute" in Forge's Further Amended Consolidated List Statement.
[2016] FCAFC 2.
Gilmour, Perram and Beach JJ.
At [155].
At [156].
For example, see Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 at [5] (French CJ) and [100] and [102] (Gummow, Hayne, Crennan, Kiefel and Bell JJ).
See [25] above
Being the "DPS Project Risks", the "Further Clough Issues", the "RSM General Findings", the "RSM DPS Project Findings" and the "Further RSM Cash Flow Findings".
To adopt Mr Brereton's description.
[2017] NSWSC 1406.
At [176].
Mahoney v McManus (1981) 180 CLR 370; [1981] HCA 54 at [18] (Gibbs CJ, Murphy and Aickin JJ agreeing); reaffirmed in Lavin v Toppi (2015) 254 CLR 459; [2015] HCA 4 at [34] (French CJ, Kiefel, Bell, Gageler and Keane JJ).
HIH Claims Support Ltd v Insurance Australia Ltd (2011) 244 CLR 72; [2011] HCA 31 at [39] (Gummow ACJ, Hayne, Crennan and Kiefel JJ).
Government Insurance Office (NSW) v Crowley [1975] 2 NSWLR 78 at p 79.
Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [38] (French CJ, Gummow, Hayne and Bell JJ).
HIH Claims Support Ltd v Insurance Australia Ltd at [39], citing Caledonian Railway Company v Colt (1860) 3 Macq 833 at 844.
Mahoney v McManus at [18].
La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 31 FCR 83 at [17] (French J).
HIH Claims Support Ltd v Insurance Australia Ltd at [47].

Amendments 24 May 2021 - Addition of counsel 27 May 2021 - Case title on coversheet amended 10 June 2021 - Addition of counsel DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 June 2021

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